If you have to borrow money, especially from a financial institution, chances are you will sign a promissory note.
Promissory notes are debt instruments accepted in most countries, and they are common in business transactions. A promissory note becomes a legally binding document when both the lender and borrower sign it. In this post, we review a promissory note more in-depth.
What Is a Promissory Note?
The promissory note is a unique debt instrument that binds a borrower to pay a lender a specific sum of money at a given date or on-demand. It’s a legally binding promise by the note issuer to pay a payee a definite amount of money as agreed.
Although promissory notes are more common in banks, individuals and companies can use them when lending money.
Promissory notes are either secure or unsecured. With a secured promissory, the borrower needs to provide collateral in addition to a good credit score. On the other hand, an unsecured promissory note requires the payer to have a healthy credit score before you can lend them the money.
Let us look at the different kinds of promissory that are in use.
Types of Promissory Notes
In the early days, promissory notes were an alternate currency, free of government control. The 1930 Geneva Convention governs promissory notes, and it’s mandatory to include the words ‘promissory note’ when you are preparing one.
There are different kinds of promissory notes that you can issue when lending money. This section reviews the most common type of promissory notes in use and when you can use each of them.
Student loan promissory notes
The first promissory note that most Americans sign is the student loan promissory note. Students must sign promissory notes before they take out their student loans. In some instances, schools allow students to sign the master’s promissory note.
It enables the student to receive multiple student loans as long as they are eligible.
The student promissory note outlines the following
- Rights and responsibilities of the student
- A promise to pay the loan and interest to the U.S department of education
- Student contact information
- The employment details of the student
- Name of the Student referee and their contact number
Simple promissory notes
A simple promissory note guarantees the lender they will get their money. It assures the lender that the borrower will return the money at the agreed time. A simple promissory note does not detail the purpose of the money borrowed.
Real estate promissory note
When getting a home loan, you will use the real estate promissory note. The house or real estate you want to purchase acts as collateral for the loan. If you fail to honor this promissory note, the lender will place the property under lien.
Commercial promissory notes
A commercial promissory note is more formal and contains the conditions of a loan in detail.
Banks, loan agencies, and credit unions mostly issue commercial promissory notes. They are secure, and the borrower pays the loan with interest. The lender has a lien on the collateral until they receive the full loan payment.
For example, if you get an auto loan from a commercial bank, they will have a lien on the vehicle until you repay the loan.
Investment promissory note
A promissory investment note is a saleable debt instrument that companies use to raise capital. If the borrower doesn’t pay back the money, the lender can take over the company. A promissory note guarantees the investor that they will get their money as agreed.
Car promissory note
A vehicle promissory note is an agreement between the lender and a borrower to purchase a car. A vehicle promissory note should contain details and the make of the vehicle.
Informal promissory note
If you want to lend your friends and family money, you issue them an informal promissory note. It is also known as a personal promissory note and does not contain a lot of detail. It only guarantees the lender the borrower will return the money.
So, What Can You Do With It?
You can use a promissory when issuing different types of loans. Lenders can use a promissory note when issuing auto loans, mortgages, business loans, student loans, and any other kind of loan.
The promissory is a guarantee that the lender will get the money back from the borrower.
Examples of Promissory Notes
A promissory note should suit the kind of transaction you want to execute. When drawing up a promissory note, you should work with your attorney. Since it’s legally binding, you need to make sure you get it right.
Here are sample structures of promissory notes
- $40,000 loan at a 5 percent interest – payment at $250 per month until paid in full.
- $2,000 loan to be repay $2,400 after 24 months.
- $70,000 loan – convertible to a 15 percent equity stake if the borrower fails to repay in full within four years.
- A $30,000 loan gives the borrower the option to repay at 10 percent interest or a 5 percent equity stake in their business.
How To Issue a Promissory Note
When you lend money, you will issue the borrower a promissory note. It sets the terms and details of the loan. It’s essential to ensure the note contains all the terms of the loan repayment.
The promissory notes contain the following elements;
- The details of the borrower and lender, such as name and address
- The principal, interest, and maturity date of the loan
- Date and place of issuance
- Signature of the issuer and the borrower
- Collateral for a secure promissory note
- Terms of and method of payment. You can repay promissory by
- Lump-sum
- Installment method
- Balloon payment option
- Pay on demand
When To Hire a Debt Collection Attorney
You can hire a debt collection attorney to follow up on your debt if the borrower defaults on their obligation. A promissory note can be legally binding if:
- The note clearly states the borrower and lender. Include the full details of the lender and borrower
- Interest terms and the specific amount to pay
- Signatures of the parties
Work With Hanna & Jarbo, Debt Collection Attorneys, To Recover Your Money
If you struggle to recover money from a borrower, you need to work with a debt collection attorney. The attorney will review the promissory note and advice on the best course of action.
Our attorney at Hanna & Jarbo will work with you to recover your debt. With a debt recovery rate of 85%, we assure you that we will do our best to recover the debt. Here is what you can expect from the experts.
- Free consultation
- We take care of all debts
- Pay us when we collect your money
- Compliance with the set debt collection guidelines
We also offer the following services:
- Follow up on supplier account debts
- Collect dues from a tenant and sort out any issues
- Construction debts
- General loans, promissory notes debts
- Land contract debts
- Receivables from commercial papers
- Skip tracing
We are the best debt collection attorneys in the Midwest. Contact us today to ensure your money gets recovered!